Tax Hikes Impede Sub-Saharan Africa Telecoms Growth

Telecoms operators face rising industry risks from governments’ propensity to raise taxes on what they perceive to be cash-rich industries.

This will weigh on operators’ willingness to reinvest in advancing their network coverage and quality and even innovating beyond basic offerings in many markets.

With a penetration rate of 75.4% and an estimated 751.3mn mobile phone subscribers at the end of 2017, the Sub-Saharan Africa (SSA) telecoms sector holds significant growth potential. However, traditional voice revenues have plateaued because of the uptake of data services, such as OTT platforms like WhatsApp, Facebook Messenger and Skype. This has pushed operators to diversify their revenue streams, focusing on data, but it has also opened up an opportunity for governments to widen their tax base. We caution that the growing trend of raising levies aimed at the sector will hinder the uptake of mobile services in the region.

Tax Burden A Bane For Mobile Market Maturity

Sub-Saharan Africa: Mobile and 3G/4G Forecasts, 2016 - 2022

f = Fitch Solutions forecast. Source: Fitch Solutions

The latest in a wave of telecoms-focused tax reforms sweeping the region includes:

In September 2018, the Kenyan parliament approved the Finance Bill 2018 which increased excise duty on airtime and data from 10% to 15% and raised mobile money transfer tax from 10% to 20%.

Also in September, Benin repealed a social media and internet tax law, following national protests. The law which was adopted earlier in the month, levied a fee of CFA5 (USD0.009) per Megabyte of data as well as a 5% user fee, on top of taxes, on texts and calls.

In August 2018, Zambia proposed a daily levy of ZMW0.30 (USD0.025) on WhatsApp calls.

In July 2018, Uganda implemented a daily fee of UGX200 (USD0.05) for social media users as well as a 0.5% tax on mobile money withdrawals.

Also in July, the Senegalese government introduced a Telecommunications Special Contribution (CST) levy which requires telecoms operators to pay 5% of their revenues, less taxes and interconnection fees, per quarter.

In January 2018, Côte d'Ivoire introduced a 0.5% tax on mobile money transfers.

The region’s telecoms sector is already held back by low consumer spending power, with SSA’s GDP per capita estimated at USD1, 576 at the end of 2017. We believe that where taxes are taken directly from users, price-sensitive subscribers’ demand for mobile data services will likely decline. This will be detrimental for operators particularly as they are looking to drive up their revenues from these services. As for levies directed at the operators, they will have to have to decide whether to absorb the financial burden or adjust their pricing structures in order to pass it on to their subscribers, though either option will ultimately squeeze their margins further as operators are already forced to compete on price to grow and maintain their subscriber numbers (see: ‘Tax Hike A Bane For Telecoms Growth In Senegal’, July 12 2018).

Mobile money services have also become entrenched in many economies where large rural populations lack access to formal financial services. As governments move towards taxing even the smallest transaction values, this threatens to curb the gains mobile money has made towards financial inclusion of the region’s unbanked population. And as operators try to mitigate any revenue decline from growing tax burdens, they will likely opt to reduce capital expenditure particularly in markets where the returns outlook does not justify reinvestment.

We note that the SSA’s telecoms sector is not the only one to garner interest from governments. Notably, in Tanzania and Zambia, the extractive industry has also faced tax hikes and increasing tax policy uncertainty in recent years. While in Kenya, the Finance Bill 2018 initially proposed a VAT increase of 16% on petroleum, ultimately set at 8%, meaning that increased taxes on the telecoms sector were required to meet the shortfall. The growing tendency to view the telecoms sector as one more capable of absorbing such hikes is a risk to the market.

Furthermore, governments have not only used taxation to target telecoms operators and improve their fiscal position. Some are increasingly pursuing anti-corruption initiatives, particularly focused on stemming the loss of potential tax revenues:

In Nigeria, South African operator MTN and the government are currently engaged in a dispute over an USD2bn tax bill over the latter’s repatriation of funds between 2007 and 2015.

Additionally, in June 2018, Tanzanian authorities reportedly arrested the chief executive officers of two telecoms companies on charges of tax evasion.

While in the same month the Ghanaian government announced plans to introduce a contentious telecoms revenue monitoring system.